Lexicon

What is a shadow director?

by Stephen Conmy on Sep 13, 2021

What-is-a-shadow-director

What is a shadow director? Shadow directors are individuals recognised by law as directors because of the influence or control they exercise over a company. This Lexicon guide explains more.

Although not officially appointed to the board of directors, a shadow director still influences the company’s strategy.

Several actions could make you a shadow director, including:

  • Approving expenditures
  • Securing loans or borrowings on behalf of the business
  • Participating actively in board meetings
  • Managing the business activities of the company

A shadow director has the same duties as other directors of the company. Companies should be careful to identify shadow directorships and should make sure that all legal requirements are fulfilled.

There can be harsh consequences when directors breach their responsibilities. A lack of formal appointment does not necessarily prevent this.

In short, individuals should be careful when assuming this role inadvertently since ignorance of the role may not be accepted as a legal defence.

Duties of a shadow director

Shadow directors are simply people whom the law considers to be directors. This means their responsibilities are the same as standard directors.

It is a director’s responsibility to comply with the company’s constitution and any laws applicable to the company.

Additionally, they must act in the best interest of the company’s shareholders. A director also owes a duty to the company’s creditors if the company becomes insolvent.

Who can be a shadow director?

Everyone who advises a company or its directors will not be regarded as a shadow director. For example, lawyers, consultants, and accountants provide advice but are not considered shadow directors.

Even so, shadow directors can still be professional advisors or members of advisory boards if they have the power to influence decisions. The difference here is that shadow directors are influential at the board level.

Interestingly, companies cannot be directors of another company, but they can be considered shadow directors.

Shadow directors advise the company without being appointed to the board of directors, and that advice can significantly impact the company’s operations.

You might be considered a shadow director if, for example, you regularly negotiate on behalf of the company or if you take responsibility for a whole area of the business.

Potential liabilities

A shadow director should always remain aware of their potential liability.

For example, if the company were to become insolvent, the actions of the shadow director would be examined closely by the liquidator. The director could suffer reputational damage if they fail to fulfil particular duties, and it appears that they are trying to avoid being legally responsible for their actions.

Having more board members make decisions, keeping up with filings for the company and carrying the appropriate insurance can reduce certain risks for directors.

A director could be fined or disqualified if any wrongdoing is discovered.

Also, if you are not a board member, you must respect the authority the board has given you.

Shadow directors should ‘advise, not direct’. The minutes of board meetings should show they are ‘present’ rather than in attendance.

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